Scottish Independence Would be Neutral for Residual UK Credit Rating

Scottish independence, a hot topic now that a referendum vote has been agreed for 2014, would probably be neutral for the sovereign credit profile of the residual UK, consisting of England, Wales and Northern Ireland, says Fitch Ratings. 

The UK’s AAA rating would therefore remain intact if Scotland was to vote for independence in 2014, although the credit rating agency (CRA) understandably refused to provide any such undertaking for an independent Scotland as the vote, and any resultant split, is so far off into the future. 

“Any judgement on the possible rating of an independent Scotland is impossible at this stage,” said Fitch in its ratings update to the preliminary assessment it made back in March when the debate about the timing of a referendum first arose. The assessment looked at the potential effect on the UK economy and public finances of Scottish independence, and on the UK sovereign rating, which the residual UK would inherit. The issue of how to divide the remaining North Sea oil wealth between the nations would be a crucial element in this debate, but at this stage there is an absence of information about the nature and terms of any possible independence agreement. 

Fitch adds that there is considerable uncertainty regarding key provisions such as the partition of assets and liabilities, the regime governing the financial sector, any possible currency change, and the length of a transition period towards independence, should the referendum be won by the Scottish National Party (SNP). At the moment, polls suggest that they would not win full independence, leaving the devolved Scottish Parliament with only limited powers. 

If the public debt stock were divided in proportion to GDP, both the residual UK and Scotland would be left with identical public debt ratios, and the residual UK’s debt profile would therefore be little changed, added the CRA. “Our current expectation is that Fitch-rated gilts would remain the responsibility of the residual UK, which would enter into a separate bilateral agreement with an independent Scotland regarding how the latter would contribute to servicing and repayment.”

Dividing North Sea oil geographically would leave the residual UK with only 9% of reserves, if the split were made according to the Geneva Convention’s median line rules. But direct loss of government revenue to the residual UK could be offset by a reduction in fiscal transfers to Scotland, with much of London’s tax money heading north in public sector subsidiaries. This, and the fact that UK oil revenue is forecast to decline in any case, would make the budgetary impact marginal, concluded Fitch. 

The impact on the balance of payments of a geographical oil split could be bigger, making the residual UK a net oil importer of about 2% of GDP. However, an improvement in the non-oil trade deficit of the residual UK, reflecting the higher non-oil goods and services deficit for Scotland, could partly offset the loss of energy export receipts. 

A geographical division of oil is an extreme outcome, as is a per capita division that would leave the residual UK with 92% of reserves, reflecting its much larger population. A compromise would be probably be reached, added the CRA. 

UK Prime Minister David Cameron and Scotland’s First Minister Alex Salmond signed an agreement setting out their terms for a single-question referendum on Scottish independence, to be held in autumn 2014. The UK’s AAA rating from Fitch was reaffirmed with a negative outlook on 28 September.

 

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